States compete with each other to attract business, and this competition often focuses on specific sectors of financial activity. States compete to be centers for asset management, for insurance, for listings, for derivatives markets, or for financial innovation. Private actors also engage in competition: stock exchanges, as for-profit businesses, seek to attract listings and trading activity, competing with other exchanges. Other market operators similarly seek to attract business. Private-sector actors develop standards and documentation to support financial market transactions.
Conventionally, academics and journalists focus on competition between stock exchanges to attract listings, but as Curtis Milhaupt and Wolf-Georg Ringe show in The Political Economy of Global Stock Exchange Competition, this only reflects a part of a much more interesting and important story, which, they argue, calls for “sustained scholarly engagement across law, economics, and international relations.” The paper convincingly shows why this is the case.
The paper makes two main arguments: first, that competition for IPOs is less significant than the conventional accounts assume. Second, that states regard stock exchanges as strategic assets in their competition with each other.
As to the first point, after discussing prominent examples of the conventional story (Shein, Alibaba, and Aramco), the authors note that changes in the markets—in particular, the growth of private capital— mean that IPOs are less significant for exchanges than they used to be. Faced with the increase in the prevalence of private capital, exchanges have collective action problems (e.g. P. 15), although some, such as the LSE, are developing their own private securities markets as a response. The authors argue that the largest exchanges—in particular the NYSE—are benefitting from the decline in public markets, “winning a global competition for the largest slice of a shrinking pie” (P. 16). The attractiveness of the NYSE as a listing venue, they argue, is explained by this phenomenon, rather than the result of regulatory arbitrage. In addition, they note that regulatory competition is not a significant factor for all companies (in particular for smaller companies). But, importantly, for exchanges, revenues from trading, clearing, data, and analytics are much more significant than revenues from listings (P. 11).
As to the idea that states (and the EU, in the context of the Capital Markets Union project) see themselves as having strategic interests in the competitive strength of their exchanges (P. 4), the authors identify the state’s interests as direct economic benefits in tax revenues and employment, but also indirect benefits, some of which derive from companies’ and investors’ home bias (some of which derives from regulatory constraints on certain institutional investors or on official encouragement): “given home bias on the part of listing companies and investors, domestic exchanges provide an important mechanism for funding local enterprises and generating returns to domestic savings” (P. 19). Other benefits may also accrue, for example, as firms embedded in domestic markets may be less likely to engage in aggressive tax planning (P. 20).
The EU worries, for example, in the Draghi Report, that firms that move their listings outside the EU will also relocate their economic activity outside the EU, reducing the EU’s economic competitiveness. And the authors argue that more generally states see capital markets “as strategic infrastructure, entwined with national industrial policy, data sovereignty, and global supply chain security” (P. 22). In addition to the example of the EU, the authors also describe China, the US, Singapore, India, and Israel as focusing on exchanges as strategic assets. And jurisdictions use the fact of listing as the basis for imposing regulatory requirements on firms, for example, relating to human rights and sustainability. But states may also focus on exchange activities from a geopolitical perspective in ways that may even harm their economic interests.
The complexity of the story the authors tell in this paper is important and useful, as is their invitation to researchers to engage in work to understand the links between “stock exchanges, financial sovereignty, and the quest for geopolitical advantage” (P. 32).
